Profiling Debt: Some Thoughts On Handling A Heavy Debt Load

I agree with the analogy that shedding one’s debt is so much like shedding pounds: the more pounds you carry, the tougher it is to lose weight!

We often gain weight without even noticing. Similarly, it doesn’t take much for debt to creep up on us to the point that it becomes overwhelming and almost insurmountable. But this shouldn’t be a surprise, when credit is so easy to come by.

From my meanderings throughout the web, I’ve encountered a few bloggers who’ve faced some significant debt and who’ve decided to detail their stories through their blogs.

Real People With Heavy Debt

Casey Serin

The most recognizable blogger I know whose made a notorious name for himself by falling into serious debt is Casey Serin. He secured $2.2 million dollars worth of real estate debt and discussed it ad naseum at his former blog, IAmFacingForeclosure.com. Last I heard, he had foreclosed on all his properties and had sold off his website. Since then, he’s reestablished an internet presence at some new sites, though I’m not quite sure what his level of involvement happens to be. Intrigued I was by his story that I wrote about him in a series of posts:

Debt Kid

I’ve recently come across another debt blog that sports this eye-catching title: “how I got into this 1/4 million dollar debt mess”. It’s written by someone who describes himself as a “geek in debt”. Checking out his site, I found out that Debt Kid has over $300,000 in “bad debt”, not including student loans; and more interesting is his incredible revelation that he needs to pay approximately $9,000 a month or over $100,000 a year to cover his minimum payments. So how did he get to this point? He made some bad investment moves and lost money with stock plays, options and foreign currency trading over the last three years. Debt Kid has declared bankruptcy, but vows to turn things around while sharing his feelings over his situation via his blog.

-ooOoo-

Unfortunately, because of their heavy debt, these bloggers have ended up facing bankruptcy. This got me to reflect more deeply about the subject of heavy debt. These bloggers’ stories have caught my attention because of the size of their debt and how they got to that point. But what is scary about debt is not its absolute size or the number it represents, but how it comes to exist and how insidious it becomes when it gets established.

In reality, debt doesn’t even have to be heavy to be frightening: a few thousand dollars of debt can be a bad thing to someone who has $10 in their bank account, especially if it grows unmanaged. So imagine what it’s like when your loans add up to many hundreds of thousands of dollars. Your feelings about this will depend on how well you think you can pay off your debt or how comfortable you are with handling it. In other words, massive loans are made much more terrible when there is no clear plan to wrestle it under control. But by putting together your own debt plan or by seeking professional help on the matter, you are taking steps to make your debt much less formidable.

How we incur debt affects our attitude towards it. If it happens unexpectedly, like those unwanted pounds that creep up on us, we are often alarmed. The fact is, something unexpected like this can blindside us and become a financial problem. But if we tackle debt head on with a clearly formulated strategy on how to pay it down, we can become less afraid of it.

Handling debt, just like losing weight, is a mental thing: the more prepared we are to deal with it, the better the outcome.

My Thoughts On Dealing With Big Debts

Many stories along these lines revolve around where I live, which is a high cost-of-living area. To own a home in Silicon Valley, it is not surprising to carry more than one loan to finance a home purchase. Some of my friends took on jumbo loans, others have primary and secondary loans to afford fairly modest homes for their families.

I also know a young engineer with a great job who decided to take the huge leap to buy — if you can believe it — a $1.5 million house in the most expensive part of the Bay Area. He’s in debt up to his eyeballs, but it doesn’t appear to faze him. On the outset, it seems like a crazy thing to do, but apparently, he’s got quite a number of contingency plans in case he is unable to fulfill his financial obligations.

#1 He currently has a well-paying job, which he relies on for that income stream.

#2 If he loses his job, he feels fairly well-connected and therefore confident enough that he’ll find a similar job rather quickly. He is proactive about networking in order to keep those prospects fresh and leads open.

#3 He took out a type of mortgage loan that wouldn’t adjust too soon, in order to allow him leeway to bypass any kind of real estate slump in the near term.

#4 As a last resort, he’ll probably get tenants for his home (if he hasn’t already) since he’s a single guy. With a three bedroom house, he’ll probably be able to fill up those rooms quickly, given our hot rental market at the moment.

Yes, he did stretch to afford his dream home, but while this fellow has heavy debt, he’s gotten his ducks lined up in a row in order to keep himself solvent. I thought at first he was extremely foolish for doing this given the risks he took on, but with the well thought out plan, I figured this may not be as crazy as I first assumed. [I hope his risk-taking pays off.]

Like this guy, I believe we can all look at conquering debt by having our own ducks in a row: resourcefulness, attitude, will power, determination, planning and strategy. If we can get all these lined up, there’s no debt we’d consider “heavy” and no debt we can’t vanquish.

Like a diet, I wonder what the percent of people the “fall off the wagon” (pun intended) is?

I bet it is similar since they both take daily tenacity to stick to it and be successful, both have peer pressure to go back to old habits.

The only downside to debt is there is no liposuction!

Mrs. MicahDecember 18, 2007 at 1:29 pm

There is, RacerX, it’s called bankruptcy. Neither of those is a particularly good option, though.

I made sure to have a set-up and contingency plan before I left my previous job. It’s very reassuring sometimes…

HeidiDecember 18, 2007 at 1:37 pm

I can tell you from first hand experience that people fall off the “debt payoff” wagon all of the time. I used to feel that being “almost” flush was a good reason to go on a shopping spree. Just like a dieter who loses 10 pounds and decides they “earned” that piece of cake.

As a banker, and someone with over a quarter million in debt, I can tell you the the weight-gain analogy is very accurate. Just as someone who knows that their waistbands are getting tight avoids the scale, some “gaining” debt starts shredding their credit card statements without opening them – or ignores the “total balance” line when they pay their account online.

Denial isn’t just a river in Egypt.

AnitraDecember 19, 2007 at 1:23 pm

I read the blog of a guy (http://joelmaxwell.com/) who started out with $550,000 in debt. (Not through stupid get-rich-quick investments, either.) He’s on the Dave Ramsey plan, and has eliminated more than half of that debt in two years.

I am amazed at how much determination he and his whole family show towards getting this debt GONE. I don’t have that determination and willingness to sacrifice; that’s why I’ll be in debt for a lot longer than this guy.

TimDecember 21, 2007 at 1:16 pm

the problem with highlighting people like debt kid and casey, is that they are terrible examples. These guys had/have warped realities and possess get rich quick and easy mentalities. I think there is a definite difference between people like these two and regular joe’s that have accumulated debt.

TobyDecember 22, 2007 at 4:43 pm

I hate to be a spoiled sport, but your engineer friend is not fazed by his debt because he is obviously ignorant of the true risks he is taking by getting “up to his eyeballs in debt.” I’m willing to bet he hasn’t suffered a major financial setback in his life which is why he believes he has all these great contingency plans that aren’t.

Having “a high paying job” is not a contingency plan for getting “up to your eyeballs in debt.” It’s more of a rationalization. An excuse. “Hey, I can afford the monthly payment.”

Following from that, number 2 is another rationalization. “Hey, if I screw up this gig, I can get another.” Maybe he can, maybe he can’t. Life can throw you curve balls. He’s willing to stake his dream house on it, so he’s either really confident or really foolish.

Now number 3 is more of a smart financial decision than a contingency plan. I, myself, chose a 7 year ARM because I only planned to live in my house for 5-7 years. But, being that this is your friend’s “dream home” shouldn’t he have locked in the historically low rate for 30 years? Oh right, he stretched to buy this place and we all know the correct choice when buying a house is to buy as much as you can and use creative financing so you can “afford” it.

Is there not a mortgage crisis going on? What makes this guy (who made all the same stupid moves that countless others who have already lost their homes made) smart, exactly? If he makes it out without losing the place he is lucky, and that’s about it. Risk-taker, definitely. But smart? Hardly. Ducks in a row? Huh?

Now, number 4 is an actual contingency plan. That could help him out in an actual crisis. But so could a 6 month emergency fund. So could cutting his losses and downsizing the place before it swallows him and an equity with it. Those are real contingency plans.

A high paying job? Being able to find another one that pays enough to cover the bills? Those are not contingency plans. That’s him being young and naive.

@Heidi, I know what it is like to be a dieter who struggles trying to maintain an ideal weight. And I can see how tough it is to cut back both in calories and dollars — these are all issues of needing to control ourselves. And it can be rough… I use distraction a lot in both situations — doing something else to take your mind away from food or other goodies has helped me!

@Anitra, thank you for pointing out Joel’s blog. His story should serve as a great example for others! If there are other bloggers out there in this situation, let us know about you so we can follow your journey!

@Tim, I think that Casey and Debt Kid have made big financial mistakes that came rather quickly to put them in debt. But debt is debt. Sure, they have a different profile from others who did it the slow way; but they’re faced with the same dilemma — how do you get out? You can get into deep debt in one instant, say if you became disabled and lost your job in quick succession. Bad luck, bad moves, either way we can all be vulnerable and it will be a good thing to understand what our options are in such a situation.

@Toby, I agree that trusting the job market to be around when you need it is naive, however, a few things are going for this young engineer in debt — he’s single with no dependents so he took the risk believing that now is as good a time as any “to make the gamble”. Second, he’s made solid connections in Silicon Valley, and trusts that his networking abilities will give him an advantage. Third, he’s got specialized skills and there’s clear demand for it into the foreseeable future. So even though it may seem a very high risk situation (which it is in general terms), these are some mitigating factors he’s considered while making his foray into high stakes real estate. This is by no means a defense of what he’s done as I agree it is tremendously risky and something I’d never do. However, it appears that this guy has done this deed weighing all the factors and finally deciding that the worst case scenario is something he can accept.

With the ugly property market still coming up in the horizon, it’ll be interesting to see how he manages. I’ll let you know if anything develops in this regard.

Skyler CollingsSeptember 25, 2008 at 8:34 am

I have been in debt before and paid it off. I paid off all my student loans. I paid off my car loan. I currently have a mortgage, a home equity loan and a credit card debt that need to be dealt with. This time is a little different with my wife being sick and medical bills but I will get out of debt again. “Heavy debt” is a subjective term for sure.

JudyFebruary 5, 2009 at 6:54 pm

Debt is a real concern now that the economy has tanked and many people are losing their jobs. It’s one thing to be in debt and still be employed. It’s a nightmare to be in debt and unemployed. I feel for those mentioned above. It is times like these (poor economy) that makes everyone want to evaluate their debt load and spending habits. That’s why it’s best to live on money, not on debt!
Avoid Debt

susanFebruary 21, 2009 at 12:34 pm

I agree with you; it seems like it is impossible to find a job. I will be graduating from college this year and it seems like finding an entry level job is going to be harder than I thought. I just have to have faith that I will be able to find one easily so I can begin paying off my student loans and all my debt.

Just wanted to say great post!!!

DebJuly 23, 2009 at 6:07 pm

Yes credit cards are convenient, but we know their drawbacks. Most folks swiping their cards these days are in debt. Credit card fees drive up prices. Also, each credit or debit card transaction you make is recorded so that profiles of your consumer behavior can be bought and sold. Soon, law enforcement will be able to monitor us in real time as we make credit transactions (great in the case of Amber Alerts, not- so- great for the rest of us who like to move about freely).